Economists concur that voluntary trade, whether domestic or international, promotes economic progress. The richest nations throughout history have consistently been those whose governments created legal and political environments that facilitated trade. The Japanese have engaged in domestic and foreign trade throughout their history, although there were long periods of time when past authoritarian governments severely limited international trade. Even then, some Japanese engaged in illicit trade with other Asian nations. Today, Japan enjoys the most liberal climate for domestic and international trade in its history. Compilers of the annual 2007 Index of Economic Freedom, a systematic comparison that includes most of the world’s countries, give Japan good marks for trade freedom and economic freedom in general, ranking it 18th in the world out of 157 countries surveyed and 5th out of 30 nations in the Asia/Pacific region.

Japan is a world leader in international trade and was surpassed at the end of 2005 only by the United States, Germany, and China when the export and import values (in dollars) were added together for each country. Japan’s economic recovery of the past few years has been greatly stimulated by both export and import increases, but this is particularly true in the case of exports. Since 2002 Japan’s exports of goods and services have increased by approximately 65 percent, and exports account for 16 percent of Japan’s GDP. Japan has been legitimately criticized, and still should be, by trading partners for first having formal barriers to trade and then later erecting informal ones. The 2008 economic crisis caused significant rises in the value of the Yen, which severely reduced Japanese export sales. In Japan, consumption of now cheaper imports continued to rise.

Even though Japan has improved import consumption, there are remaining traderelated problems that impede economic progress. Domestically, such informal trade barriers as unrealistically high consumer safety regulations keep out many foreign products. Also, Japanese consumers are denied access to many foreign goods and services because the political/legal structure in Japan still discourages foreign direct investment (FDI) even though the FDI level is now at a record high. In a recent survey of 141 countries, Japan ranked 131st in the percentage of GDP attributable to FDI. FDI accounts for only 2.4 percent of Japan’s GDP compared to 23 percent in the United States and 41 percent in the United Kingdom (U.S. Department of State 2007). Fewer available foreign goods and services and the difficulties foreign firms experience buying or building facilities are major reasons why Japanese consumers pay more for most goods and services than consumers in other developed countries.

The good news is that in the same survey cited here, Japan ranked 22nd out of 141 countries as a potentially attractive nation for FDI. When there is more economic freedom in Japan for FDI, there is little doubt that significant amounts will occur. Japan should also be a larger exporter, given the size of its economy and the advanced education and skills of its workforce. Most economic analysts agree that export in services is the sector of the economy for which international trade needs to be most expanded. A wide range of service industries encompassing firms ranging from finance to entertainment are candidates for export expansion if they can be globally competitive. At present, too large a percentage of Japan’s exports are manufactured goods produced by famous, internationally competitive, and well-known Japanese companies. The 2008 drop in global demand for Japanese automobiles due to the world economic slowdown illustrates the vulnerability of an export sector that depends too much on large established manufacturing companies while relying too little on services. As long as this export imbalance remains, the Japanese economy is potentially at risk if foreign demand remains low for such manufactured goods as steel, cameras, or machine tools. Most economists believe that Japan’s lower-tier industries such as food processing and construction will become more proficient exporters only as a result of further economic, legal, and political reforms, which have been discussed in this chapter as well as the previous one.

Even though different sectors of the Japanese economy are in better positions than others in international trade, larger volumes of Japanese exports are being sold to new consumers throughout the world than in the past. At the end of 2004, a significant change occurred in Japanese trade patterns. For the first time since statistics were compiled in 1947, the United States lost its position as Japan’s largest trading partner to China. This trend has continued. Although the United States remains an important Japanese trading partner, Japan has increased its trade not only with China but also with other parts of Asia. By 2006, Japan’s overall imports and exports reached record levels. As of the publication of this book, the world economic situation has negatively affected Japan’s trade balances, but with a better global economy, the situation will likely improve.